Employee contributions by a member of a public retirement system as “disposable income” for the purposes of filing for bankruptcy

NYC Employees' Retirement System v Sapir, CA2,243 F.3d 124*

Sharlene De Ann Taylor, an employee of the New York City Housing Authority [NYCHA], filed for Chapter 13 bankruptcy in accordance with 11 U.S.C. 1325(b). Her employment required Taylor to join the New York Cite Employees' Retirement System [NYCERS]. This, in turn, required that she make an employee contribution of $134.20 per month. This amount is automatically deducted from her salary and deposited with NYCERS. This mandatory employee retirement contribution is the focus of the Circuit Court of Appeals inquiry in this action.

The basic issue the Circuit Court of Appeals, Second Circuit was asked to resolve in the Taylor case was whether or not Taylor’s employee contributions to the Retirement System, required by State law, was “disposable income” within the meaning of the federal Bankruptcy Code. In other words, are the monies required as the employee's contribution to NYCERS insulated from being distributed among Taylor's creditors?

Section 1325(b)(2)(A) of the Bankruptcy Code defines “disposable income,” as is applicable here, as “income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor.” The Bankruptcy Code, however, does not define “reasonably necessary.”

The Second Circuit decided to provide bankruptcy court judges with a “flexible solution,” allowing those courts to consider the facts in each individual case in determining whether or not the pension contributions qualify as a “reasonably necessary” expense for that debtor.

If the bankruptcy judge finds that the such contributions are a reasonably necessary expense for an individual debtor based on the circumstances confronting that debtor, that amount will excluded in the determining “disposable income” for the purposes of the bankruptcy proceeding.**

Conversely, if the judge finds that the contributions are not a reasonably necessary expense for an individual debtor based on the circumstances confronting that debtor, they will be included in determining the amount of an individual's disposable income, and the employee contribution deduction will be ordered discontinued for the duration of the Bankruptcy Plan. In determining whether or not pension contributions are reasonably necessary for an individual debtor, the Circuit Court said that the bankruptcy judge may consider any factors properly before the court, including but not limited to:

1. The age of the debtor and the amount of time until expected retirement;

2. The amount of the monthly contributions and the total amount of pension contributions debtor will have to buy back if the payments are discontinued;

3.The likelihood that buy-back payments will jeopardize the debtor's fresh start;

4. The number and nature of the debtor's dependents;

5. Evidence that the debtor will suffer adverse employment conditions if the contributions cease;

6. The debtor's yearly income; and

7. The debtor's overall budget

The Circuit Court also said that the Bankruptcy Court judge could also consider any other constraints on the debtor that make it likely that the pension contributions are reasonably necessary expenses for that debtor. These could include, for example, the obligations set out in a divorce decree with respect to distribution of pension assets to a spouse.

The court commented that “[a]dministrative inconvenience to NYCERS and NYCHA, however, is not to be considered. The impact on the administrator of the fund is irrelevant in determining whether or not the pension contribution is a reasonably necessary expense to an individual debtor.

* The respondent “Sapir” is Jeffrey L. Sapir, the standing Chapter 13 Trustee for the Southern District of New York.

** A retirement system member’s retirement allowance consists of two parts: an annuity portion funded by the employee’s contributions to the system and a pension portion underwritten by employer contributions to the system. Presumably the “discontinuation of employee contributions” for the duration of the Bankruptcy Plan will have an impact only on the annuity portion of the individual’s retirement allowance.